One of the joys of being a lawyer is that you get paid to think about risk. Well, not so much "think about" as "eat, sleep, and live" risk. It's inherent in the job we do. "Can I do X," says the client. "Well," says the lawyer, "if you do, there is a risk that..."
And when this speech starts rolling, you can almost feel the business team's eyes rolling into the backs of their skulls. It's not that the business doesn't care about risk. Most business people, in my opinion, do care about risk. They just don't value it the same as lawyers. The "why" of this is not something I can speak to with any expertise, but I think one contributing factor is a mismatched perception of when a deal has been sufficiently finalized to control for risk.
Take, for example, a fairly typical license deal cycle. An idea is generated, business people talk to business people, and a tentative arrangement (the "cocktail napkin" arrangement) is hammered out. Then (hopefully) the legal team is brought into the loop, and sometimes is told something like "we need a term sheet today," or "a full agreement will kill this deal," or "if we don't get something -- anything -- in writing today, someone else will swoop in and take the deal." So the legal team hammers out a short term sheet with some, but not all, pertinent language in it, and puts a little gem like this at the bottom:
The parties will use good faith efforts to execute a long-form agreement within X days of the effective date of this term sheet. Until such time as the long-form agreement is executed, this term sheet will remain in effect.
On the one hand, you've got a signed agreement, so the business is happy. They're excited to start work. They might even start work on the assumption that any remaining details will be worked out at a later date. After all, you've "papered the deal," right?
On the other hand, the lawyers know that the agreement you've signed is woefully insufficient at controlling a variety of foreseeable risks. Not everything can be crammed into four or five pages, and risk mitigation for certain circumstances is often left out in favor of the more salient deal points like timing, money, etc. And yet there is no obligation to do anything about it on their party - "good faith efforts" is not the same as "you will."
Thus, you've got a split in perception of risk control, and so long as the business thinks the deal's risks have been dealt with, their incentive to push through the long-form will be reduced. Then attention gets directed elsewhere, and before you know it, you're at the end of the deal cycle and the long-form never got signed.
Fortunately, situation such as this sometimes blow up and stand as a cautionary tale for others to learn from. Take this one for example: last week, a Swedish company called ProCloud Media Invest AB sued Paramount Pictures for backing out of a licensing arrangement for ProCloud to develop games based upon Paramount's entertainment properties. ProCloud's lawsuit claims that it paid Paramount Pictures $1 million and "fully performed" the dutuies of a "co-producer," but the studio shuttered its digital entertainment division before ProCloud could started producing the subject to the license. Now, ProCloud is suing Paramount for $10 million.
Digging into the complaint a little bit, one learns that the parties executed a "deal memo" and an amendment to the deal memo, but never executed the full, long-form agreement. The complaint further alleges that four weeks after executing the amendment, Paramount shut down the digital entertainment studio.
Out the outset of some (brief) analysis, let me be clear. I HAVE NOT READ THE DEAL MEMO OR THE AMENDMENT. I don't know what these documents say, nor am I expressing any opinion about what either party should or should not have done in this situation. Rather, having been in situations similar to this, I can tell you that termination provisions in deal memos do not tend to be overly extensive. It would be a rare deal memo that contemplates a termination provision for a complete shuttering of the business line. Meanwhile, a full license could (should) include well-crafted license termination conditions.
So, as a lawyer for a video games company, or perhaps a business development team member who plays a bit of a legal role, how can you ensure that you get the protections of the long-form while facing the inertia of a business that just wants to move forward? Here are some tips to consider:
- If possible, set an expiration date on the deal memo. If you set an expiration on the deal memo or, say, 60 days after signature, this puts a lot of incentive on all parties to come to the table and negotiate the long-form. It is a much better way to ensure that a long-form gets done as opposed to the "gem" stock language from above. Of course, this is not something that you can get into every deal, but can be a powerful tool when appropriate.
- Tie specific provisions to long-form execution. One of my favorites is tying the payment schedule to the long-form execution, as opposed to payment on execution of the deal memo. Money gets everyone's attention, so even if you can't put a short expiration date into the deal memo, tying the long-form execution to the payment schedule is a way to build a similar incentive.
- Make sure the long-form is in your queue. All too often, the responsibility for ensuring execution of the long-form falls through the cracks because the business thinks legal is handling this, and legal thinks the business is driving it. Take ownership of this up front, keep the business people in the loop on its progress. This will show the business that you - legal - are taking this seriously, which can communicate more about risk control than any conversation you could have with them.
- Take the time to put license terminations into a deal memo. Know that even if you follow the above tips, you may find yourself operating under a deal memo for an extended period of time. Company cultures, industry norms, development schedule - all of these can give rise to a situation where is it not tenable to negotiate out a long-form. In such situations, even basic "the license may be terminated at licensor's discretion in the event that..." provisions can be lifesavers.